During 2015, the Company
issued 29,410 shares of common stock upon conversion of notes (see Note 11).
During 2015, the Company
issued 620,000 shares with a fair value of $111,200 to an advisory firm for consulting services.
During 2015, the Company
issued 503,333 stock warrants for consulting services performed valued at $75,000.
During 2015, the Company
allocated $354,632 of convertible note proceeds for the fair value of warrants and beneficial conversion feature to additional
paid in capital.
During 2015, the Company
issued 120,000 shares to an advisory firm for consulting services. The shares vested in two tranches, with 60,000 shares vesting
in the quarter ended December 31, 2014 and remaining 60,000 shares vesting in the quarter ended March 31, 2015. The Company recorded
consulting expenses of $10,800 in the quarter ended December 31, 2014 and $27,600 of consulting expenses in the quarter ended March
31, 2015. In each instance, the expense was based on the fair value on the vesting date.
During 2014, the Company
issued 1,732,946 shares of common stock upon conversion of notes (see Note 11).
During 2014, the Company
issued 60,000 shares of its common stock for consulting services at $0.17 per share.
During 2014, the Company
issued 333,333 stock warrants for consulting services valued at $75,000.
During 2014, the Company allocated $121,741
of convertible note proceeds for the fair value of warrants and beneficial conversion feature to additional paid in capital.
Notes to Consolidated Financial Statements
|
1.
|
Business
AND BASIS OF PRESENTATION
|
Calmare Therapeutics
Incorporated (the “Company”) was incorporated in Delaware in 1971 as Competitive Technologies, Inc., succeeding an
Illinois corporation incorporated in 1968. Effective August 20, 2014, the Company changed its name from Competitive Technologies,
Inc. to Calmare Therapeutics Incorporated. The Company and its majority-owned (56.1%) subsidiary, Vector Vision, Inc., (collectively,
"we,” “our,” or “us”), is a medical device company developing and commercializing innovative
products and technologies for chronic neuropathic pain and wound care affliction patients. The Company’s flagship medical
device, the Calmare
®
Pain Therapy Device (the “Calmare Device”), is the world’s only non-invasive
and non-addictive modality that can successfully treat chronic, neuropathic pain.
In 2007, the Company
entered into an agreement (the “2007 Agreement”) with Giuseppe Marineo (“Marineo”) and Delta Research and
Development (“Delta”), Mr. Marineo’s wholly-owned company, collectively (the “Parties”), that secured
the exclusive, worldwide sales and distribution rights to the science behind Calmare Pain Mitigation Therapy™ (the “Technology”).
Today, this science is effectuated by the Company’s flagship medical device – the Calmare Device. Sales of our Calmare
Device continue to be the major source of revenue for the Company. In 2011, the Company’s 2007 agreement was amended (the
“2011 Amendment”) to extend the exclusivity rights afforded to the Company by the 2007 Agreement through March 31,
2016.
In July 2012, the Company
and the Parties worked on a five-year extension to the 2011 Agreement (the “2012 Amendment”). However, the Company
believes that the 2012 Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently deemed
null and void. Therefore, the Company’s rights are determined by the 2011 Amendment which provides the Company with the exclusive
rights to manufacture and sell the Calmare Device worldwide using the Technology. The Company is negotiating an extension to the
2007 Agreement. (see
The Company’s Distribution Rights, Marineo and Delta
in Footnote 16,
COMMITMENTS AND CONTINGENCIES)
Since then the Company
has entered into multiple sales agreements for the Calmare device. Sales to physicians and medical practices and to others with
whom the Company had existing sales agreements continue to generate revenue for the Company. In June 15, 2010, the Company became
a government contractor and was granted its first General Services Administration (“GSA”) contract (V797P-4300B) from
the U.S. Veterans Administration (the “VA”) for Calmare Devices.
The Company has a device
manufacturing agreement, (the “Manufacturing Agreement”), with GEOMC Co., Ltd. (“GEOMC”, formerly Daeyang
E & C Co., Ltd.) of Seoul, South Korea, to manufacture the Calmare Device, as per the specification delineated in the Company’s
Food and Drug Administration’s 510k clearance (#K081255). As per this “clearance,” the Company has the sole,
irrevocable right to sell the Calmare Device in the United States and global reciprocity countries. The Manufacturing Agreement
is in effect for a period of ten (10) years through 2017, subject to terms and conditions.
The consolidated financial
statements include the accounts of the Company and its majority-owned subsidiary, Vector Vision, Inc. Inter-company accounts and
transactions have been eliminated in consolidation.
The Company has incurred
operating losses since fiscal 2006 and has a working capital and shareholders’ deficiency at December 31, 2015. We continue
to seek revenue from expansion of sales of the Calmare devices into new markets. At current reduced spending levels, the Company
may not have sufficient cash flow to fund operations through 2016. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include adjustments to reflect the possible future effect
of the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome
of this uncertainty.
The Company's continuation
as a going concern is dependent upon its developing other recurring revenue streams sufficient to cover operating costs. If necessary,
we will meet anticipated operating cash requirements by further reducing costs, issuing debt or equity, and/or pursuing sales of
certain assets and technologies while we continue to pursue increased sales of our Calmare devices. The Company does not have any
significant capital requirements in the budget going forward. There can be no assurance that the Company will be successful in
such efforts. To return to and sustain profitability, we must increase our revenue through sales of our Calmare Devices and other
products and services related to the Devices. Our recent $15 million contract with the U.S. Government over five years will significantly
improve our revenue streams. Failure to develop a recurring revenue stream sufficient to cover operating expenses would negatively
affect the Company’s financial position.
Our liquidity requirements
arise principally from our working capital needs, including funds needed to find and obtain new technologies or products, and protect
and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash on hand,
debt and equity financing, and cash flows from operations, if any, including royalty legal awards. At December 31, 2015, we had
outstanding debt, in the form of promissory notes with a total principal amount of $4,653,000 and a carrying value of $4,339,000.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of Estimates
The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
requires that we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses,
and disclosure of contingent assets and liabilities. Actual results could differ significantly from our estimates.
Revenue Recognition
We earn revenue in
two ways: retained royalties from licensing our clients' and our own technologies to our customer licensees, and sales of finished
products. We record revenue when the terms of the sales arrangement are accepted by all parties including a fee that is fixed and
determinable, delivery has occurred and our customer has taken title, and collectability is reasonably assured, net of sales tax.
We are the primary
obligor, responsible for delivering devices as well as for training our customers in the proper use of the device. We deal directly
with customers, setting pricing and providing training; work directly with the inventor of the technology to develop specifications
and any changes thereto and to select and contract with manufacturing partners; and retain significant credit risk for amounts
billed to customers. Therefore, all product sales are recorded following a gross revenue methodology.
Revenue from foreign
sources was 13% of total revenue in 2014. The Company received no revenue from foreign sources in 2015.
The Company continues
to receive retained royalties as a result of the licensing of patents derived from the Company’s prior business model. We
determine the royalty revenue for a given period from the cash we receive in that period. These revenues are declining as the Company
no longer actively licenses patents and existing agreements are reaching the end of their term.
Unless otherwise specified, we record all
other revenue, as earned.
Concentration of Revenues
Total revenue consists
of revenue from product sales, retained royalties, and other income. During the year ended December 31, 2015, we derived approximately
$891,500 or 89.5% of total revenue from sales of our Calmare devices. An additional 4% of revenue derived indirectly from those
sales through sales of supplies and training, rental payments and the sale of rental assets.
During the year ended
December 31, 2014, we derived approximately $1,045,000 or 89.8% of total revenue from sales of our Calmare devices. An additional
4% of revenue derived indirectly from those sales through sales of supplies and training, rental payments and the sale of rental
assets.
Expenses
Cost of product sales
includes contractual payments to inventor and manufacturer relating to our Calmare Device. Expenses associated with shipping Devices
are also included in cost of product sales.
Selling expenses include
commission expenses and other direct sales costs related to sales of Calmare Devices.
Personnel and consulting
expenses include employee salaries and benefits, marketing and consulting expenses related to technologies and specific revenue
initiatives, and other direct costs.
General and administrative
expenses include directors' fees and expenses, public company related expenses, professional services, including financing, audit
and legal services, rent and other general business and operating expenses.
Fair Value of Financial Instruments
The Company believes
the carrying amounts of cash, accounts receivable, deferred revenue, preferred stock liability and notes payable approximate fair
value due to their short-term maturity.
Inventory
Inventory consists
of finished product of our Calmare Device. Inventory is stated at lower of cost (first in, first out) and market.
Property and Equipment
Property and equipment
are carried at cost net of accumulated depreciation. Expenditures for normal maintenance and repair are charged to expense as incurred.
The costs of depreciable assets are charged to operations on a straight-line basis over their estimated useful lives, three to
five years for equipment, or the terms of the related lease for leasehold improvements. The cost and related accumulated depreciation
or amortization of property and equipment are removed from the accounts upon retirement or other disposition, and any resulting
gain or loss is reflected in earnings.
Impairment of Long-lived Assets
We review our long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
If the estimated fair value is less than the carrying amount of the asset, we record an impairment loss. If a quoted market price
is available for the asset or a similar asset, we use it to determine estimated fair value. We re-evaluate the remaining useful
life of the asset and adjust the useful life accordingly. There were no impairment recorded during the years ended
December 31, 2015 and 2014.
Income Taxes
Income taxes are accounted
for under an asset and a liability approach that requires recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the Company's consolidated financial statements and income tax returns.
The Company provides a valuation allowance for deferred income tax assets when it is considered more likely than not that all or
a portion of such deferred income tax assets will not be realized.
Net Income (Loss) Per Share
We calculate basic
net income (loss) per share based on the weighted average number of common shares outstanding during the period without giving
any effect to potentially dilutive securities. Net income (loss) per share, assuming dilution, is calculated giving effect to all
potentially dilutive securities outstanding during the period.
Share-Based Compensation
The Company accounts
for its share-based compensation in accordance with the Financial Accounting Standards Board's (“FASB”) Accounting
Standards Codification (“ASC”) 718 – “Compensation – Stock Compensation.” Accordingly, the
Company recognizes compensation expense equal to the fair value of the stock awards at the time of the grant over the requisite
service period.
Our accounting for
share-based compensation has resulted in our recognizing non-cash compensation expense related to stock options granted to employees,
which is included in personnel and consulting expenses, and stock options granted to our directors, which is included in general
and administrative expenses.
Recent Accounting Pronouncements
In May 2014, the FASB
issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, as amended
by ASU 2015-14, that outlines a single comprehensive model for entities to use in accounting for revenue recognition and supersedes
most current revenue recognition guidance, including industry-specific guidance. The amendments in this accounting standard update
are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices,
and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting
periods beginning after December 15, 2017, with early adoption permitted after December 31, 2016. The Company is currently assessing
the impact that this standard will have on its consolidated financial statements.
In August 2014, the
FASB issued ASU No. 2014-15,
Presentation of Financial Statements – Going Concern,
which provides guidance on management’s
responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern
and the related footnote disclosure. For each reporting period, management will be required to evaluate whether there are
conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year
from the date the financials are issued. When management identifies conditions or events that raise substantial doubt about
the entity’s ability to continue as a going concern, the ASU also outlines disclosures that are required in the company’s
footnotes based on whether or not there are any plans intended to mitigate the relevant conditions or events to alleviate the substantial
doubt. The ASU becomes effective for annual periods ending after December 15, 2016, and for any annual and interim periods
thereafter. Early application is permitted. The Company is currently assessing the impact that this standard will have
on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory – Simplifying the Measurement of Inventory,
which requires that inventory be measured at the lower of cost
and net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. Replacing
the concept of market with the single measurement of net realizable value is intended to create efficiencies for preparers. Inventory
measured using the last-in, first-out (LIFO) method and the retail inventory method are not impacted by the new guidance. The ASU
becomes effective for fiscal years beginning after December 15, 2016, including interim periods with those fiscal years. Early
application is permitted. We do not expect the adoption to have a material impact on our consolidated financial statements.
In current and prior
years, we generated significant federal and state income and alternative minimum tax losses, and these net operating losses ("NOLs")
were carried forward for income tax purposes to be used against future taxable income.
A reconciliation of
our effective income tax rate compared to the U.S. federal statutory rate is as follows:
|
|
Year ended
December 31, 2015
|
|
|
Year ended
December 31, 2014
|
|
Provision (benefit) at U.S. federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State provision (benefit), net of U.S. federal tax
|
|
|
(4.9
|
)
|
|
|
(4.9
|
)
|
Permanent differences
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
1.9
|
|
|
|
2.5
|
|
Deferred tax valuation allowance
|
|
|
(36.9
|
)
|
|
|
(35.5
|
)
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Net deferred tax assets consist of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Net federal and state operating loss carryforwards
|
|
$
|
18,513,698
|
|
|
$
|
16,912,223
|
|
Impairment of investments
|
|
|
531,470
|
|
|
|
531,470
|
|
Other, net
|
|
|
795,327
|
|
|
|
767,266
|
|
Deferred tax assets
|
|
|
19,840,495
|
|
|
|
18,210,959
|
|
Valuation allowance
|
|
|
(19,840,495
|
)
|
|
|
(18,210,959
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2015,
we had aggregate federal net operating loss carryforwards of approximately $46,284,000 which expire at various times from 2017
through 2035. A majority of our federal NOLs can be used to reduce taxable income used in calculating our alternative minimum tax
liability. We also have state net operating loss carryforwards of approximately $47,722,000 that expire at various times through
2035.
Approximately $4,308,000
of our NOL carryforward remaining at December 31, 2015 was derived from income tax deductions related to the exercise of stock
options. The tax effect of these deductions will be credited against capital in excess of par value at the time they are utilized
for book purposes, and not credited to income. We will never receive a benefit for these NOLs in our statement of operations.
Changes in the valuation allowance were
as follows:
|
|
Year ended
December 31,
2015
|
|
|
Year ended
December 31,
2014
|
|
Balance, beginning of year
|
|
$
|
18,210,959
|
|
|
$
|
16,967,149
|
|
Change in temporary differences
|
|
|
28,061
|
|
|
|
79,840
|
|
Change in net operating and capital losses
|
|
|
1,601,476
|
|
|
|
1,163,970
|
|
Balance, end of year
|
|
$
|
19,840,495
|
|
|
$
|
18,210,959
|
|
Our ability to derive
future tax benefits from the net deferred tax assets is uncertain and therefore we continue to provide a full valuation allowance
against the assets, reducing the carrying value to zero. We will reverse the valuation allowance if future financial results are
sufficient to support a carrying value for the deferred tax assets.
At December 31, 2015 and December 31, 2014,
we had no uncertain tax positions.
We include interest and penalties on the
underpayment of income taxes in income tax expense.
We file income tax returns in the United
States and Connecticut. Our open tax years for review are fiscal years ended December 31, 2012 through year ended December 31,
2014. The Company's returns filed with Connecticut are subject to audit as determined by the statute of limitations.
|
4.
|
NET
LOSS PER COMMON SHARE
|
The following sets
forth the denominator used in the calculations of basic net loss per share and net loss per share assuming dilution:
|
|
Year ended
December 31,
2015
|
|
|
Year ended
December 31,
2014
|
|
Denominator for basic net loss per share, weighted average shares outstanding
|
|
|
27,855,238
|
|
|
|
23,513,870
|
|
Dilutive effect of common stock options
|
|
|
N/A
|
|
|
|
N/A
|
|
Dilutive effect of Series C convertible preferred stock and convertible debt
|
|
|
N/A
|
|
|
|
N/A
|
|
Denominator for net loss per share, assuming dilution
|
|
|
27,855,238
|
|
|
|
23,513,870
|
|
Due to the net loss
incurred for the years ended December 31, 2015, and December 31, 2014, the denominator used in the calculation of basic net loss
per share was the same as that used for net loss per share, assuming dilution, since the effect of any options, convertible preferred
shares, convertible debt or warrants would have been anti-dilutive.
Potentially dilutive securities outstanding are summarized as
follows:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Exercise of common stock options
|
|
|
2,038,500
|
|
|
|
1,692,500
|
|
Exercise of common stock warrants
|
|
|
9,207,486
|
|
|
|
4,450,536
|
|
Conversion of Series C convertible preferred stock
|
|
|
2,450,980
|
|
|
|
2,828,054
|
|
Conversion of convertible debt
|
|
|
11,442,095
|
|
|
|
4,783,272
|
|
Total
|
|
|
25,139,061
|
|
|
|
13,754,362
|
|
|
5.
|
SHAREHOLDERS’
DEFICIENCY
|
Common Stock
During 2013, the Company
entered into an Equity Purchase Agreement (“EPA”) with Southridge Partners II, L.P. (“Southridge”). Under
the terms of the EPA, which was filed with the SEC on February 26, 2013, Southridge will purchase, at the Company's election, up
to $10,000,000 of the Company's registered common stock (the "Shares"). During the two year term of the EPA, the Company
may at any time in its sole discretion deliver a "put notice" to Southridge thereby requiring Southridge to purchase
a certain dollar amount of the Shares. Simultaneous with the delivery of such Shares, Southridge shall deliver payment for the
Shares. Subject to certain restrictions, the purchase price for the Shares shall be equal to ninety percent of the lowest closing
bid price for the Company's common stock during the ten-day trading period immediately after the Shares specified in the Put Notice
are delivered to Southridge.
The number of Shares
sold to Southridge shall not exceed the number of such shares that, when aggregated with all other shares of common stock of the
Company then beneficially owned by Southridge, would result in Southridge owning more than 9.99% of all of the Company's common
stock then outstanding. Additionally, Southridge may not execute any short sales of the Company's common stock.
Under the terms of
the EPA, the Company had issued a convertible promissory note in the amount of $65,000 to Southridge which, during 2013 Southridge
converted to 260,000 shares of common stock. In addition, during 2013, the Company negotiated a liabilities purchase agreement
(“LPA”) with Southridge (see Note 11).
Under the terms of
the LPA, the Company issued 200,000 shares of its common stock at $0.35, or $70,000, and a convertible note in the amount of $12,000
Southridge as a fee.
Additionally, under
the terms of the EPA and LPA, the Company issued 250,000 shares of its common stock at $0.35, or $87,500, to Southridge for expenses
associated with the EPA and LPA.
On August 14, 2014,
the shareholders approved an amendment to the Company’s certificate of incorporation to effect up to a one-for-ten reverse
stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding common stock. The Board of Directors,
in its sole discretion, has discretion to implement the Reverse Stock Split. As of March 15, 2016, the Board of Directors has not
implemented the Reverse Stock Split.
During 2014, the Company
did a series of private offerings of its common stock and warrants, for consideration of $830,500. 4,152,500 shares of common stock
were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 2,076,250 shares of common
stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital.
During 2014, the Company
issued 60,000 shares to a consulting firm for marketing services performed and recorded consulting expense of $10,200 for the fair
value of the stock.
During 2014, the Company
issued 333,333 stock warrants with a fair value of $75,000 for consulting services. The Company is amortizing $75,000 over the
service period and recorded $37,500 of expense in 2014.
During 2015, the Company
issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting services.
During 2015, the Company
issued 120,000 shares to an advisory firm for consulting services. The shares vested in two tranches, with 60,000 shares vesting
in 2014 and remaining 60,000 shares vesting in 2015. The Company recorded consulting expenses of $10,800 in 2014 and $27,600 of
consulting expenses in 2015. In each instance, the expense was based on the fair value on the vesting date.
During 2015, the Company
issued 503,333 stock warrants for consulting services performed and recorded consulting expense of $75,000 for the fair value of
the warrants.
During 2015, the Company
issued 120,000 shares to an advisory firm for consulting services. The Company recorded consulting expenses of $31,200 based on
the fair value on the issuance date.
During 2015, the Company
did private offerings of its common stock and warrants for a total consideration of $365,000. 1,825,000 shares of common stock
were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 912,500 shares of common
stock. The warrants have an exercise price of $0.60 and a 1-year term. The warrants were recorded to additional paid-in-capital.
On October 15, 2015
the shareholders approved an increase in the number of authorized shares of common stock from 40 million to 100 million.
The Company issued
12,500 and 10,625 shares of its common stock to non-employee directors under its Director Compensation Plan in 2015 and 2014, respectively.
The Company recorded expense of $2,125 and $4,038 for director stock compensation expense in 2015 and 2014, respectively.
Preferred Stock
Holders of 5% preferred
stock are entitled to receive, if, as, and when declared by the Board of Directors, out of funds legally available therefore, preferential
non-cumulative dividends at the rate of $1.25 per share per annum, payable quarterly, before any dividends may be declared or paid
upon or other distribution made in respect of any share of common stock. The 5% preferred stock is redeemable, in whole at any
time or in part from time to time, on 30 days' notice, at the option of the Company, at a redemption price of $25. In the event
of voluntary or involuntary liquidation, the holders of preferred stock are entitled to $25 per share in cash before any distribution
of assets can be made to holders of common stock.
Each share of 5% preferred
stock is entitled to one vote. Holders of 5% preferred stock have no preemptive or conversion rights. The preferred stock is not
registered to be publicly traded.
At its December 2,
2010 meeting, the Company’s Board of Directors declared a dividend distribution of one right (each, a “Right”)
for each outstanding share of common stock, par value $0.01, of the Company (the “Common Shares”). The dividend was
payable to holders of record as of the close of business on December 2, 2010 (the “Record Date”). Issuance of the dividend
may be triggered by an investor purchasing more than 20% of the outstanding shares of common stock.
On December 15, 2010
the Company issued a $400,000 promissory note. The promissory note was scheduled to mature on December 31, 2012 with an annual
interest rate of 5%.
On December 15, 2010,
the Company's Board of Directors authorized the issuance of 750 shares of Series C Convertible Preferred Stock ($1,000 par value)
with a 5% cumulative dividend to William R. Waters, Ltd. of Canada. On December 30, 2010, 750 shares were issued. The Company converted
the above $400,000 promissory note into 400 shares and received cash of $350,000 for the remaining 350 shares.
Effective June 16,
2011, William R. Waters, Ltd. of Canada converted one half of its Series C Convertible Preferred Stock, or 375 shares, to 315,126
shares of common stock.
The rights of the Series C Convertible Preferred
Stock are as follows:
|
a)
|
Dividend rights
– The shares of Series C Convertible Preferred Stock accrue a 5% cumulative dividend on a quarterly basis and is payable on the last day of each fiscal quarter when declared by the Company’s Board. As of December 31, 2015 dividends declared were $103,200, of which $18,750 were declared during the year ended December 31, 2015 and $84,452 have not been paid and are shown in accrued and other liabilities at December 31, 2015.
|
|
b)
|
Voting rights
– Holders of these shares of Series C Convertible Preferred Stock shall have voting rights equivalent to 1,000 votes per $1,000 par value Series C Convertible Preferred share voted together with the shares of Common Stock
|
|
c)
|
Liquidation rights
– Upon any liquidation these Series C Convertible Preferred Stock shares shall be treated as equivalent to shares of Common stock to which they are convertible.
|
|
d)
|
Conversion rights
– Holder has right to convert each share of Series C Convertible Preferred Stock at any time into shares of the Company's common stock at a conversion price for each share of common stock equal to 85% of the lower of (1) the closing market price at the date of notice of conversion or (2) the mid-point of the last bid price and the last ask price on the date of the notice of conversion. The variable conversion feature creates an embedded derivative that was bifurcated from the Series C Convertible Preferred Stock on the date of issuance and was recorded at fair value. The derivative liability will be recorded at fair value on each reporting date with any change recorded in the Statement of Operations as an unrealized gain (loss) on derivative instrument.
|
On the date of conversion
of the 375 shares of Series C Convertible Preferred Stock the Company calculated the value of the derivative liability to be $81,933.
Upon conversion, the $81,933 derivative liability was reclassified to equity.
The Company recorded
a convertible preferred stock derivative liability of $66,177 associated with the 375 shares of Series C Convertible Preferred
Stock outstanding at both December 31, 2015 and 2014.
The Company has classified
the Series C Convertible Preferred Stock as a liability at December 31, 2015 and 2014 because the variable conversion feature may
require the Company to settle the conversion in a variable number of its common shares.
Receivables consist of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Calmare device sales receivable, net of allowance of $210,284 and $209,533 at December 31, 2015 and 2014, respectively
|
|
$
|
31,827
|
|
|
$
|
-
|
|
Royalties, net of allowance of $101,154 at December 31, 2015 and 2014
|
|
|
-
|
|
|
|
-
|
|
Other, net of allowance of $6,221 and $6,972 at December 31, 2015 and 2014, respectively
|
|
|
1,254
|
|
|
|
2,319
|
|
Total
|
|
$
|
33,081
|
|
|
$
|
2,319
|
|
|
7.
|
PROPERTY
AND EQUIPMENT, NET
|
Property and equipment, net, consist of
the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Property and equipment, gross
|
|
$
|
220,051
|
|
|
$
|
215,491
|
|
Accumulated depreciation and amortization
|
|
|
(196,325
|
)
|
|
|
(179,851
|
)
|
Property and equipment, net
|
|
$
|
23,726
|
|
|
$
|
35,640
|
|
Depreciation and amortization expense was
$16,475 and $17,547 for the years ended December 31, 2015 and 2014, respectively.
|
8.
|
AVAILABLE-FOR-SALE
AND EQUITY SECURITIES
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
Number of
shares
|
|
|
Type
|
Security Innovation, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
223,317
|
|
|
Common stock
|
Xion Pharmaceutical Corporation
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
|
Common stock
|
In prior years, we
acquired 3,129,509 shares of NTRU Cryptosystems, Inc. ("NTRU") common stock, and certain preferred stock that later was
redeemed, in exchange for cash and a reduction in our future royalty rate on sales of NTRU's products. NTRU was a privately held
company that sold encryption software for security purposes, principally in wireless markets. There was no public market for NTRU
shares. In 2003, we wrote down the value of NTRU to $0, but we continued to own the shares. On July 22, 2009, all NTRU assets were
acquired by Security Innovation, an independent provider of secure software located in Wilmington, MA. We received 223,317 shares
of stock in the privately held Security Innovation for our shares of NTRU.
In September 2009 we
announced the formation of a joint venture with Xion Corporation for the commercialization of our patented melanocortin analogues
for treating sexual dysfunction and obesity. We received 60 shares of privately held Xion Pharmaceutical Corporation common stock
in June 2010. CTI currently owns 30% of the outstanding stock of Xion Pharmaceutical Corporation.
|
9.
|
FAIR
VALUE MEASUREMENTS
|
The Company measures
fair value in accordance with Topic 820 of the FASB ASC, Fair Value Measurement (“ASC 820”), which provides a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described
as follows:
|
Level 1 -
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
|
|
|
|
Level 2 -
|
Inputs to the valuation methodology include:
|
|
|
·
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
·
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
|
·
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
|
·
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
|
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
|
|
|
Level 3 -
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The asset's or liability's
fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable
inputs.
The Company values
its derivative liability associated with the variable conversion feature on its Series C Convertible Preferred Stock (Note 5) based
on the market price of its common stock. For each reporting period the Company calculates the amount of potential common
stock that the Series C Preferred Stock could convert into based on the conversion formula (incorporating market value of our common
stock) and multiplies those converted shares by the market price of its common stock on that reporting date. The total
converted value is subtracted by the consideration paid to determine the fair value of the derivative liability. The Company classified
the derivative liability of $66,000 at both December 31, 2015 and December 31, 2014, in Level 2 of the fair value hierarchy.
The methods described
above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.
Furthermore, while the Company believes its valuation method is appropriate and consistent with other market participants, the
use of different methodologies or assumptions to determine the fair value could result in a different fair value measurement at
the reporting date.
|
10.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets
consist of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Prepaid insurance
|
|
$
|
47,931
|
|
|
$
|
71,651
|
|
Clinical trial
|
|
|
-
|
|
|
|
109,119
|
|
Other
|
|
|
10,103
|
|
|
|
72,332
|
|
Prepaid expenses and other current assets
|
|
$
|
58,034
|
|
|
$
|
253,102
|
|
|
11.
|
LIABILITIES
ASSIGNED TO LIABILITY PURCHASE AGREEMENT
|
During the third quarter
of 2013, the Company negotiated a LPA with Southridge. The LPA takes advantage of a provision in the Securities Act of 1933, Section
3(a)(10), that allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by
a court proceeding. The process, approved by the court in August 2013, has the potential to eliminate nearly $2.1 million of our
financial obligations to existing creditors who agreed to participate and executed claims purchase agreements with Southridge’s
affiliate ASC Recap accounting for $2,093,303 of existing payables, accrued expenses and other current liabilities, and notes payable.
The process began with the issuance in September 2013 of 1,618,235 shares of the Company’s common stock to ASC Recap. During
September and October 2013, ASC Recap sold the Company’s common stock and during the three months ended March 31, 2014 paid
creditors approximately $80,000 from the proceeds and retained a service fee of approximately $27,000. During 2014, the Company
also made cash payments of $18,000 for accrued expenses previously included in the LPA amount. As of March 15, 2016, no further
shares of the Company’s common stock had been issued to ASC Recap to settle creditors’ balances.
There can be no assurance that the Company
will be successful in completing this process with Southridge, and the Company retains ultimate responsibility for this debt, until
fully paid.
|
12.
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
Accrued expenses and other liabilities consist
of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Royalties payable
|
|
$
|
487,739
|
|
|
$
|
314,787
|
|
Accrued compensation
|
|
|
49,769
|
|
|
|
23,573
|
|
Commissions payable
|
|
|
15,900
|
|
|
|
15,900
|
|
Accrued interest payable
|
|
|
1,589,256
|
|
|
|
987,659
|
|
Other
|
|
|
205,360
|
|
|
|
248,263
|
|
Accrued expenses and other liabilities, net
|
|
$
|
2,248,024
|
|
|
$
|
1,590,182
|
|
Excluded above is approximately
$217,000 of accrued expenses and other liabilities for both December 31, 2015 and December 31, 2014 that fall under the LPA with
ASC Recap, and are expected to be repaid using the process as described in Note 11. Because there can be no assurance
that the Company will be successful in completing this process, the Company retains ultimate responsibility for these liabilities,
until fully paid down.
As of December
31, 2015 and 2014, approximately $1,453,000 and $922,000, respectively, of accrued interest is to related parties.
Notes payable consist of the following:
Short term
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
90 day Convertible Notes (Chairman of the Board)
|
|
$
|
2,498,980
|
|
|
$
|
2,498,980
|
|
24 month Convertible Notes ($100,000 to Board member)
|
|
|
225,000
|
|
|
|
225,000
|
|
10 day Note (Board member)
|
|
|
-
|
|
|
|
42,500
|
|
Series A-3 OID Convertible Notes and Warrants
|
|
|
14,353
|
|
|
|
11,765
|
|
Series B-2 OID Convertible Notes and Warrants
|
|
|
1,532,710
|
|
|
|
244,565
|
|
Short term notes payable, gross
|
|
|
4,271,043
|
|
|
|
3,022,810
|
|
Less LPA amount
|
|
|
(485,980
|
)
|
|
|
(485,980
|
)
|
Short term notes payable, net
|
|
$
|
3,785,063
|
|
|
$
|
2,536,830
|
|
Long term
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Series B-1 OID Convertible Notes and Warrants
|
|
$
|
67,919
|
|
|
$
|
56,659
|
|
Details of notes payable as of December 31,
2015 are as follows:
Short term
|
|
Principal
Amount
|
|
|
Carrying
Value
|
|
|
Cash
Interest
Rate
|
|
|
Common
Stock
Conversion
Price
|
|
|
Maturity
Date
|
90 day Convertible Notes (Chairman of the Board)
|
|
$
|
2,498,980
|
|
|
$
|
2,498,980
|
|
|
|
6
|
%
|
|
|
$1.05
|
|
|
Various 2014
|
24 month Convertible Notes ($100,000 to Board member)
|
|
|
225,000
|
|
|
|
225,000
|
|
|
|
6
|
%
|
|
|
$1.05
|
|
|
3/2014 – 6/2014
|
Series A-3 OID Convertible Notes and Warrants
|
|
|
11,765
|
|
|
|
14,353
|
(1)
|
|
|
None
|
|
|
|
$0.25
|
|
|
1/2015
|
Series B-2 OID Convertible Notes and Warrants
|
|
|
1,837,647
|
|
|
|
1,532,710
|
|
|
|
None
|
|
|
|
$
0.20 – 0.25
|
|
|
8/2015 – 12/2016
|
Short term notes payable, gross
|
|
$
|
4,573,392
|
|
|
|
4,271,043
|
|
|
|
|
|
|
|
|
|
|
|
Less LPA amount
|
|
|
|
|
|
|
(485,980
|
)
|
|
|
|
|
|
|
|
|
|
|
Short term notes payable, net
|
|
|
|
|
|
$
|
3,785,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-1 OID Convertible Notes
and Warrants
|
|
$
|
80,000
|
|
|
$
|
67,919
|
|
|
|
None
|
|
|
|
$0.23
|
|
|
3/2017
|
|
(1)
|
Includes $2,588 of accrued loss on conversion of OID note.
|
90 day Convertible Notes
The Company has issued
90-day notes payable to borrow funds from a director, now the chairman of our Board, as follows:
2013
|
|
$
|
1,188,900
|
|
2012
|
|
|
1,210,000
|
|
2011
|
|
|
100,000
|
|
Total
|
|
$
|
2,498,980
|
|
These notes have been extended
several times and all bear 6.00% simple interest. A conversion feature was added to the Notes when they were extended, which allows
for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date
– the date the funds are received – at a rate of $1.05 per share. Additional terms have been added to
all Notes to include additional interest of 1% simple interest per month on all amounts outstanding for all Notes if extended beyond
their original maturity dates and to provide the lender with a security interest in unencumbered inventory and intangible assets
of the Company other than proceeds relating to the Calmare Device and accounts receivable.
Due to the Board’s
February 10, 2014 decision authorizing management to nullify certain actions taken by prior management, the additional terms noted
above were not approved and therefore, the additional interest for the extension of the Notes was not recorded. During 2014, management
has been in negotiations to modify the terms of the Notes. However, until those negotiations are resolved, the Company has agreed
to honor the additional terms and as such, the Company recorded additional interest of $388,000 and $602,000 during the years ended
December 31, 2015 and December 31, 2014, respectively.
A total of $485,980 of
the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected
to be repaid using the process as described in Note 11. Because there can be no assurance that the Company will be successful in
completing this process, the Company retains ultimate responsibility for this debt, until fully paid down. As a result, the Company
continues to accrue interest on these notes and they remain convertible as described above.
24 month Convertible Notes
In March 2012, the Company
issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued
in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal
amounts to common stock is allowed at any time at a rate of $1.05 per share.
As of March 15, 2016 the
Company has not repaid the principal due on the March 2012 $100,000 note, the April 2012 $25,000 note or the June 2012 $100,000
note and is in default under the terms of the notes. There is also unpaid interest of $33,000 related to these notes.
10 day Note
In late December 2014,
the Company issued a 10 day non-interest bearing note to a Board member in the amount of $42,500. This note was repaid in early
January 2015.
Series A-3 Original Issue Discount Convertible
Notes and Warrants
During the quarter ended
March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants, under which it issued
$64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal
amount consists of $9,706 of original issue discount. The notes are convertible at an initial conversion price of $0.25 per share
any time after issuance thereby having an embedded beneficial conversion feature.
The note holders were also
issued market-related warrants for 192,412 in shares of common stock. The warrants have an exercise price $0.60 and a term of 2
years. The beneficial conversion feature, if any, and the warrants were recorded to additional paid-in-capital. The Company allocated
the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time
of issuance. The total debt discount is amortized over the life of the notes to interest expense.
The beneficial conversion
feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion
price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated
the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
2 years
|
|
Volatility
|
|
|
184.88
|
%
|
Risk Free Rate
|
|
|
0.32
|
%
|
The proceeds of the Notes were allocated to
the components as follows:
|
|
Proceeds allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
32,390
|
|
Private Offering Warrants
|
|
|
14,845
|
|
Beneficial Conversion feature
|
|
|
7,765
|
|
Total
|
|
$
|
55,000
|
|
During 2014, certain holders
of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion related to the Series A-3 OID
convertible notes. Due to the timing of receipt of the notices by the Company, certain Note holders (“Noteholders”)
received their shares during the quarter ended June 30, 2014, while other Noteholders received or are due to receive their shares
after June 30, 2014. Additionally, the Company offered certain Noteholders an inducement to convert their notes to shares. The
inducement, when offered, provided Noteholders a conversion price of $0.20. All other original terms, including the warrant terms,
remained the same. Upon notice of conversion and irrespective of whether the shares were delivered in the quarter ended June 30,
2014 or subsequent to June 30, 2014 the Company: (i) accelerated and recognized as interest expense in the current period any remaining
discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement.
Presented below is summary
information related to the conversion:
Statement of Operations
|
|
|
|
|
Loss on conversion of notes
|
|
$
|
43,288
|
|
Accelerated interest expense
|
|
$
|
35,109
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Shares issued as of June 30, 2014
|
|
|
798,825
|
|
Shares issued subsequent to June 30, 2014
|
|
|
529,415
|
|
Principal amount of notes converted
|
|
$
|
265,648
|
|
During the quarter ended
March 31, 2015, a holder of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion related
to the Series A-3 OID convertible notes. Additionally, the Company offered the Noteholder an inducement to convert these notes
to shares. The inducement provided the Noteholder a conversion price of $0.20. All other original terms, including the warrant
terms, remained the same. Upon notice of conversion, the Company: (i) accelerated and recognized as interest expense in the current
period any remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion
inducement. As of March 15, 2016, the Company had not issued the shares due related to the conversion notice.
Presented below is summary
information related to the conversion:
Statement of Operations
|
|
|
|
|
Loss on conversion of notes
|
|
$
|
2,588
|
|
Accelerated interest expense
|
|
$
|
-
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Shares issued
|
|
|
-
|
|
|
|
|
|
|
Principal amount of notes converted
|
|
$
|
11,765
|
|
Series B-1 Original
Issue Discount Convertible Notes and Warrants
During the quarter ended
March 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $80,000 of convertible
promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists
of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share any time after
issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for
185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-year term. The beneficial conversion feature
and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial
conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized
over the life of the notes to interest expense.
The beneficial conversion
feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion
price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated
the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
4 years
|
|
Volatility
|
|
|
151.52
|
%
|
Risk Free Rate
|
|
|
1.32
|
%
|
The proceeds of the Notes were allocated to
the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
34,272
|
|
Private Offering Warrants
|
|
|
26,811
|
|
Beneficial Conversion feature
|
|
|
3,917
|
|
Total
|
|
$
|
65,000
|
|
The Series B-1 OID notes
include an anti-dilution provision that if the Company issues more than 20 million shares of its common stock, subject to certain
exceptions, the conversion price of the notes and the conversion price of the warrants would be subject to an automatic pre-determined
price adjustment. During the quarter ended December 31, 2014 the Series B-1 OID noteholder and the Company agreed that this anti-dilution
provision had been triggered and the Series B-1 OID note share conversion price was adjusted down to $0.23 per share, which increased
the number of shares available upon conversion to 347,826. The anti-dilution provision in the Warrant changed the share purchase
price downward to $0.33 per share but did not change the number of shares available under the Warrant.
As a result of the triggering
of the above noted one time anti-dilution provision, the Company reallocated the proceeds of the Notes during the quarter ended
December 31, 2014 as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
46,222
|
|
Private Offering Warrants
|
|
|
18,778
|
|
Beneficial Conversion feature
|
|
|
-
|
|
Total
|
|
$
|
65,000
|
|
Series B-2 Original Issue Discount Convertible
Notes and Warrants
During the quarter ended
December 31, 2014, the Company did private offerings of convertible notes and warrants, under which it issued $358,824 of convertible
promissory notes for consideration of $305,000, the difference between the proceeds from the notes and principal amount consists
of $53,824 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after
issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for
897,060 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature
and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial
conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized
over the life of the notes to interest expense.
The beneficial conversion
feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion
price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated
the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
188.31
|
%
|
Risk Free Rate
|
|
|
0.11
|
%
|
The proceeds of the Notes were allocated to
the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
224,679
|
|
Private Offering Warrants
|
|
|
57,854
|
|
Beneficial Conversion feature
|
|
|
22,467
|
|
Total
|
|
$
|
305,000
|
|
During the quarter ended
June 30, 2015, a holder of Series B-2 OID convertible notes and warrants delivered to the Company a notice of conversion related
to the Series B-2 OID convertible notes, with a principal amount of $5,882. In the quarter ended September 30, 2015, the Company
issued 29,410 shares due related to the conversion notice.
As of December 31, 2015,
the remaining notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default
under the terms of the notes.
During the quarter ended
March 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $302,353
of convertible promissory notes for consideration of $257,000, the difference between the proceeds from the notes and principal
amount consists of $45,353 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share
any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related
warrants for 755,882 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial
conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to
the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total
debt discount is amortized over the life of the notes to interest expense.
The beneficial conversion
feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion
price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated
the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
|
Warrants
|
|
Expected term
|
|
|
1
year
|
|
Volatility
|
|
|
180.15-185.71
|
%
|
Risk Free Rate
|
|
|
0.18-0.22
|
%
|
The proceeds of the Notes
were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
197,521
|
|
Private Offering Warrants
|
|
|
46,097
|
|
Beneficial Conversion feature
|
|
|
13,382
|
|
Total
|
|
$
|
257,000
|
|
During the quarter ended
September 30, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $705,882
of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and principal
amount consists of $105,882 of original issue discount. The notes are convertible at an initial conversion price of $0.25 per share
any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related
warrants for 1,411,764 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial
conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to
the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total
debt discount is amortized over the life of the notes to interest expense.
The beneficial conversion
feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion
price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated
the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
171.36
|
%
|
Risk Free Rate
|
|
|
0.28
|
%
|
The proceeds of the Notes
were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
342,857
|
|
Private Offering Warrants
|
|
|
120,000
|
|
Beneficial Conversion feature
|
|
|
137,143
|
|
Total
|
|
$
|
600,000
|
|
During the quarter ended
December 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $470,588
of convertible promissory notes for consideration of $400,000, the difference between the proceeds from the notes and principal
amount consists of $70,588 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share
any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related
warrants for 1,176,470 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial
conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to
the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total
debt discount is amortized over the life of the notes to interest expense.
The beneficial conversion
feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion
price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated
the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
132.44
|
%
|
Risk Free Rate
|
|
|
0.66
|
%
|
The proceeds of the Notes
were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
361,991
|
|
Private Offering Warrants
|
|
|
38,009
|
|
Beneficial Conversion feature
|
|
|
|
|
Total
|
|
$
|
400,000
|
|
Tonaquint 9% Original Issue Discount Convertible
Notes and Warrants
During the quarter ended
September 30, 2013, the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a
$112,500 convertible promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal
amount consisted of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discount
was being amortized over the life of the note. The note was convertible at an initial conversion price of $0.30 per share at any
time, and contained a “down-round protection” feature that requires the valuation of a derivative liability associated
with the note. The note bore interest at 7% and was due in May 2014. Tonaquint was also issued a market-related warrant for $112,500
in shares of common stock with a “cashless” exercise feature. The warrant had a $0.35 exercise price, a 5-year term
and included a “down-round protection” feature that required it to be classified as a liability rather than as equity.
During the first quarter
of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant. The warrant was settled
during the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the
second quarter of 2014 for cash payments totaling $144,000 ($20,000 paid in the first quarter of 2014 and $124,000 paid in the
second quarter of 2014). Because the execution of the debt settlement agreement in the first quarter of 2014 resulted in a significant
modification of the original terms of the note agreement, the Company adjusted the carrying value of the note in the first quarter
of 2014 and recorded a related loss of approximately $34,000.
Southridge
During 2013, the Company
issued a six-month $12,000 convertible note payable to Southridge to cover legal expenses as part of the LPA (see Note 11). The
convertible note was convertible into the Company’s common stock at the greater of $0.25 or 85% of the average closing bid
price during the five (5) trading days prior to conversion and was due in June 2014.
During the third quarter
of 2014, the Company issued to Southridge 50,000 shares in exchange for and in full satisfaction for the note and recorded a $5,500
loss upon conversion of the note.
|
14.
|
STOCK-BASED COMPENSATION PLANS
|
2011 Employees', Directors'
and Consultants' Stock Option Plan –
In May 2011, the Board of Directors approved a new option plan for employees, directors
and consultants. Pursuant to this plan which is administered by a Committee appointed by the Board of Directors, we could grant
to qualified employees, directors and consultants either incentive options or nonstatutory options (as defined by the Internal
Revenue Service). The stock options granted per written option agreements approved by the Committee, must have exercise prices
not less than 100% of the Fair Market Value of our common stock on the date of the grant. Up to 2,000,000 common shares are available
for grants under this plan. No options may be granted under this plan after December 31, 2015.
The following information relates to the 2011
Option Plan:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Common shares reserved for issuance on exercise of options
|
|
|
1,867,500
|
|
|
|
1,517,500
|
|
Shares available for future option grants
|
|
|
0
|
|
|
|
482,500
|
|
1997
Employee
Stock Option Plan
– Pursuant to our 1997 Employees' Stock Option Plan, as amended (the "1997 Option Plan"),
we could grant to employees either incentive stock options or nonqualified stock options (as defined by the Internal Revenue Service).
The stock options had to be granted at exercise prices not less than 100% of the fair market value of our common stock at the grant
date. The maximum life of stock options granted under this plan is ten years from the grant date. The Compensation Committee or
the Board of Directors determined vesting provisions when stock options were granted, and stock options granted generally vested
over three or four years. No options could be granted under this plan after September 30, 2007.
The following information relates to the 1997
Option Plan:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Common shares reserved for issuance on exercise of options
|
|
|
51,000
|
|
|
|
55,000
|
|
Shares available for future option grants
|
|
|
-
|
|
|
|
-
|
|
2000 Director's Stock
Option Plan
– Pursuant to our Directors' Stock Option Plan (the "Directors' Option Plan"), we could grant each
non-employee director 10,000 fully vested, nonqualified common stock options when the director first is elected, and 10,000 common
stock options on the first business day of January thereafter, as long as the individual is a director. All such stock options
are granted at an option price not less than 100% of the fair market value of the common stock at the grant date. The maximum life
of options granted under this plan is ten years from the grant date. No options could be granted after January 4, 2010.
The following information relates to the 2000
Directors' Stock Option Plan:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Common shares reserved for issuance on exercise of options
|
|
|
120,000
|
|
|
|
120,000
|
|
Shares available for future option grants
|
|
|
-
|
|
|
|
-
|
|
Summary of Common Stock
Options
– The total fair value of shares vested in the years ended December 31, 2015 and December 31, 2014 was $61,186
and $57,291, respectively, of non-cash compensation expense. Of these amounts, $53,223 and $46,113 was included in personnel and
consulting expenses, from stock options granted to employees, and vesting during the year ended December 31, 2015 and 2014, respectively.
Also $7,963 and $11,178
of noncash compensation expense was included in general and administrative expenses, from stock options granted to directors pursuant
to the Directors Option Plan in the years ended December 31, 2015 and 2014, respectively. Since these stock options are fully vested
upon grant, the full fair value of the stock options is recorded as expense at the date of grant.
During the year ended December
31, 2014, the Company granted 42,500 options to non-employee directors which were fully vested upon issuance, as approved by the
Board of Directors.
During the year ended December
31, 2014, the Company granted 300,000 options to the former CFO. As approved by the Board of Directors, these options vest over
a four (4) year period, with 60,000 options vested upon issuance and another 60,000 vested on his one-year anniversary. Because
the former CFO is no longer employed by the Company as of January 8, 2016, 180,000 options will be cancelled and 120,000 vested
options will expire 90 days from January 8, 2016, per the Option Agreement.
During the year ended December
31, 2014, the Company granted 20,000 options to employees. As approved by the Board of Directors, these options vest over a four
(4) year period, with 20% of the options vested upon issuance.
During the year ended December
31, 2015, the Company granted 50,000 options to non-employee directors which were fully vested upon issuance, as approved by the
Board of Directors.
During the year ended December
31, 2015, the Company granted 300,000 options to the Company’s Chief Medical Officer. As approved by the Board of Directors,
these options vest over a four (4) year period, with 60,000 options vested upon issuance.
We estimated the fair value
of each option on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Year
ended
December 31, 2015
|
|
|
Year
ended
December 31, 2014
|
|
Dividend
yield
(1)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
(2)
|
|
|
159.8%
- 164.5
|
%
|
|
|
118.5%
- 122.24
|
%
|
Risk-free interest
rates
(3)
|
|
|
1.61
|
%
|
|
|
1.19
– 1.72
|
%
|
Expected lives
(2)
|
|
|
5
years
|
|
|
|
4-5
years
|
|
|
(1)
|
We have not paid cash dividends on our common stock since 1981, and currently do not have plans to pay or declare cash dividends. Consequently, we used an expected dividend rate of zero for the valuations.
|
|
(2)
|
Estimated based on our historical experience. Volatility was based on historical experience over a period equivalent to the expected life in years.
|
|
(3)
|
Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.
|
A summary of the status of all our common stock
options as of December 31, 2015 and 2014, and changes during the periods then ended is presented below.
|
|
Year ended December 31, 2015
|
|
|
Year ended December 31, 2014
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Values
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Values
|
|
Outstanding at beginning of period
|
|
|
1,692,500
|
|
|
$
|
0.44
|
|
|
|
|
|
|
$
|
1,372,000
|
|
|
$
|
0.50
|
|
|
|
|
|
Granted
|
|
|
350,000
|
|
|
|
0.26
|
|
|
|
|
|
|
|
362,500
|
|
|
|
0.39
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(30,500
|
)
|
|
|
2.03
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired or terminated
|
|
|
(4,000
|
)
|
|
|
5.34
|
|
|
|
|
|
|
|
(11,500
|
)
|
|
|
2.87
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2,038,500
|
|
|
$
|
0.40
|
|
|
$
|
100,550
|
|
|
|
1,692,500
|
|
|
$
|
0.44
|
|
|
$
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at end of year
|
|
|
1,212,500
|
|
|
$
|
0.52
|
|
|
$
|
60,550
|
|
|
|
844,500
|
|
|
$
|
0.70
|
|
|
$
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
|
826,000
|
|
|
$
|
0.21
|
|
|
$
|
40,000
|
|
|
|
848,000
|
|
|
$
|
0.18
|
|
|
$
|
48,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options issued during the year
|
|
|
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
$
|
0.26
|
|
|
|
|
|
Generally, we issue new shares of common stock
to satisfy stock option exercises.
We have an employee-defined
contribution plan qualified under section 401(k) of the Internal Revenue Code (the "Plan"), for all employees age 21
or over, and meeting certain service requirements. The Plan has been in effect since January 1, 1997. Participation in the Plan
is voluntary. Employees may defer compensation up to a specific dollar amount determined by the Internal Revenue Service for each
calendar year. We do not make matching contributions, and employees are not allowed to invest in our stock under the Plan.
Our directors may authorize
a discretionary contribution to the Plan, allocated according to the provisions of the Plan, and payable in shares of our common
stock valued as of the date the shares are contributed. No contributions were accrued or made in the years ended December 31, 2015
and 2014.
|
16.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
–
Future minimum rental payments
required under operating leases with remaining non-cancelable lease terms as of December 31, 2015 are as follows:
More than 5 years
|
|
$
|
-
|
|
3-5 years
|
|
|
-
|
|
1-3 years
|
|
|
12,000
|
|
Within 1 year
|
|
|
70,000
|
|
Total
|
|
$
|
82,000
|
|
Total rental expense for all operating leases
was:
|
|
Year ended
December 31,
2015
|
|
|
Year ended
December 31,
2014
|
|
Minimum rental payments
|
|
$
|
68,315
|
|
|
$
|
56,615
|
|
Deferred rent charge
|
|
|
(4,793
|
)
|
|
|
8,397
|
|
|
|
$
|
63,522
|
|
|
$
|
65,012
|
|
Contingencies – Revenue based
As of December 31, 2015,
the Company and its majority owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenues, to
repay up to $165,788 and $199,334, respectively, in consideration of grant funding received in 1994 and 1995. The Company also
is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to certain inventions supported by the
grant funds. VVI is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing
supported products, if any.
Contingencies - The
Company’s Distribution Rights, Marineo and Delta
On April 8, 2014, Mr. Giuseppe
Marineo, Delta Research and Development (“Delta”), Mr. Marineo’s research company, and Delta International Services
and Logistics (“DIS&L”), Delta’s commercial arm in which Mr. Marineo is the sole beneficiary of all proceeds
as its founder and sole owner (collectively the “Group”), issued a press release (the “Group’s Press Release”)
regarding the Company, stating that the Company did not have authority to sell, distribute and manufacture the Calmare Device as
an exclusive agent of the Group. The Company issued a corporate response in a press release dated April 11, 2014 stating that the
Group’s Press Release was inaccurate and has since been purged by the overseeing body of wire services.
This issue between the
Company and the Group is over the validity of a 2012 Amendment to a Sales and Representation Agreement (the “Amendment”)
which, if valid and enforceable, may have compromised its rights to sell, distribute and manufacture the Calmare Device as an exclusive
agent of the Group in the global marketplace, especially in the European, Middle Eastern and North African (“EMENA”)
territory which was responsible for approximately 70% of gross Calmare Device sales in 2011. However, the Company believes that
the Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently deemed null and void.
Therefore, the parties’ rights are determined by an earlier agreement whereby the Company still possesses the authority to
sell, distribute and manufacture Calmare Devices as a world-wide exclusive agent of the Group.
On April 16, 2014, counsel
for the Group (“Group Counsel”) sent a cease and desist letter (“Cease and Desist Letter”) to the Company,
requesting a confirmation that the Company would no longer hold itself out as an agent of the Group permitted to sell, distribute
and manufacture Calmare Devices world-wide including the EMENA territory.
The Company responded on
April 25, 2014 to the Cease and Desist Letter, disputing Group Counsel’s interpretation of the events surrounding the execution
of the Amendment. At this time, the Company continues to work to find a reasonable and amicable resolution to the situation.
Contingencies –
Litigation
Tim Conley
(case
pending)
- On August 18, 2014, notice was issued to the Company that on June 23, 2014, Timothy Conley (the “Plaintiff”)
filed a complaint against the Company, in the United States District Court for the District of Rhode Island. The complaint alleges
that the Company’s former acting interim CEO, Johnnie Johnson, and Plaintiff entered into an agreement whereby the Company
agreed to make payments to Plaintiff. Among other allegations, Plaintiff claims that the Company’s nonpayment to Plaintiff
constitutes a breach of contract. The Company believes it has meritorious defenses to the allegations and the Company intends to
vigorously defend against the litigation.
GEOMC
(case pending)
-
On August 22, 2014, GEOMC filed a complaint against the Company in the United States District Court for the District
of Connecticut. The complaint alleges that the Company and GEOMC entered into a security agreement whereby in exchange for GEOMC’s
sale and delivery of the Scrambler Therapy devices (the “Devices”), the Company would grant GEOMC a security interest
in the Devices. Among other allegations, GEOMC claims that the Company has failed to comply with the terms of the security agreement
and seeks an order to the Court to replevy the Devices or collect damages. The Company believes it has meritorious defenses to
the allegations and the Company intends to vigorously defend against the litigation. On February 4, 2016, the Company announced
that it is discussing a settlement with GEOMC, however, to date, no settlement has been reached.
Summary
–
We may be a party to other legal actions and proceedings from time to time. We are unable to estimate legal expenses or losses
we may incur, if any, or possible damages we may recover, and we have not recorded any potential judgment losses or proceeds in
our financial statements to date. We record expenses in connection with these suits as incurred.
An unfavorable resolution
of any or all matters, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions
and proceedings may, depending on the amount and timing, have a material adverse effect on our consolidated financial position,
results of operations or cash flows in a particular period.
Unsigned Agreements
The Company uses two unrelated
firms to provide marketing and investor relations services, CME Acuity (“CMEA”) and Legend Capital Management (“LCM”),
respectively. The LCM and CMEA agreements were not signed due to an inability to come to final terms due to certain nuances in
either agreement that included but were not limited to assignment of human capital and allowable performance based bonus(es). However,
from the start date until December 31, 2015, the respective firms were being compensated for services rendered on a “pay-as-we
go” basis (the “Arrangement”). The aforementioned Arrangement is expected to continue for the next few consecutive
quarters until such time as their agreements can be consummated.
|
17.
|
RELATED PARTY TRANSACTIONS
|
Our board of directors determined that when
a director's services are outside the normal duties of a director, we compensate the director at the rate of $1,000 per day, plus
expenses, which is the same amount we pay a director for attending a one-day Board meeting. We classify these amounts as consulting
expenses, included in personnel and consulting expenses.
At December 31, 2015, $2,598,980 of the outstanding
Notes were payable to related parties; $2,498,980 to the chairman of our Board, Peter Brennan, and $100,000 to another director,
Stan Yarbro.
On September 15, 2015,
the Company announced the appointment of Stephen J. D’Amato, M.D. as chief medical officer of the Company. During 2010, Calmar
Pain Relief, LLC, purchased 10 Calmare devices from the Company for an aggregate purchase price of $550,000. Additionally, during
2015 and 2014, Calmar Pain Relief purchased certain supplies from the Company. Dr. D’Amato is one of the managing members
of Calmar Pain Relief, LLC.
On October 15, 2015, the
Company entered into a consulting agreement with VADM Robert T. Conway, Jr., U.S. Navy, (Ret) (the “Admiral”), a member
of the Company’s Board of Directors. The agreement is for one year and includes compensation of a monthly retainer fee of
$7,500 and a five-year warrant to purchase 167,000 shares of common stock of the Company, fully vested on the date of issuance,
at a strike price of $.60 per share. As a result of this agreement, the Board of Directors has determined that the Admiral is no
longer an independent director of the Company.
On January 8, 2016, the
Board of Directors of the Company determined that it would not be continuing to employ Ian Rhodes as the Company’s Executive
Vice President and Chief Financial Officer. Mr. Rhodes’ termination from employment was effective on January 8, 2016. Mr.
Rhodes termination did not result from disagreement with the Company on any matter relating to the Company’s operations,
policies or practices.
On January 11, 2016, the
Company appointed Thomas P. Richtarich as Chief Financial Officer of the Company. Mr. Richtarich served as a consultant to the
Company prior to being hired as the Company’s Chief Financial Officer. Initially, the Company provided Mr. Richtarich with
the compensation he received as a consultant equal to $9,500 per month plus expenses. On April 11, 2016, the Company entered into
an employment agreement with Mr. Richtarich. Under the terms of the agreement, Mr. Richtarich will receive an annual base salary
of $150,000 and will be eligible for an annual bonus of 40% of the base salary, subject to the attainment of mutually agreed upon
milestones. In addition, Mr. Richtarich will be granted 300,000 stock options that will be subject to an equity plan that the Company
intends to establish in the near term. These options will vest over a five (5) year period.
On January 15, 2016, the
Company appointed Dr. Christine Chansky, M.D., J.D., F.C.L.M. as its chief regulatory officer (CRO). As part of her duties, she
will spearhead all of the Clinical studies sponsored by the Company and oversee all global regulatory issues related to the Company’s
medical device practice. On January 15, 2016, the Company entered into an employment agreement with Dr. Chansky. Under the terms
of the agreement, Dr. Chansky will receive an annual base salary of $185,000 and will be eligible for an annual bonus of 40% of
the base salary, subject to the attainment of mutually agreed upon milestones. In addition, Dr. Chansky will be granted 300,000
stock options that will be subject to an equity plan that the Company intends to establish in the near term. These options will
vest over a five (5) year period.
On February 18, 2016,
the Company announced it has been issued a general supply order contract from the U.S. Government (GSA contract number #V797P-4300B).
The Company estimates this contract will total $15 million over the next 60 months.
During the quarter
ended March 31, 2016, the Company did an additional private offering of convertible notes and warrants, under which it issued
$705,882 of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes
and principal amount consists of $105,882 of original issue discount. The notes are convertible at an initial conversion
price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders
were also issued market-related warrants for 7,058,824 in shares of common stock. The warrants have an exercise price of
$0.60 and a 6-month term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The
Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative
fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest
expense.
During April, 2016, the
Company issued 261,943 shares of common stock to Conrad Mir, its President & CEO, as payment for unpaid bonus and unused vacation
amounts from 2015, per the Board of Directors. 100% of the stock vested immediately.